So the wait is over for Mark Johnson, his family and friends, and the news is not good, as we reported last week. There is not a lot to say about this from his perspective, thankfully most, if not all, of us have no idea what it is like to be incarcerated, we can only wish him well.
Before moving on, I have to note that I still think there is a problem with the details of the conviction. As far as I can tell having read pretty much all the testimony, Johnson did not directly lie to the client, one of his staff did; and given how the judges say that sterling trader Frank Cahill (in London) was not aware of the “no-ramp” guarantee to Cairn Energy and did not speak to Johnson (in New York) until 2.45pm, 15 minutes before the Fix, how can the judges then state in their judgement that Johnson “instructed” Cahill to “ramp” it? The conversation appears to have actually been about making sure the market did not go too far in that last 15 minutes, rather than ‘ramping it’.
Either way, the conviction has stood, and it is hard to escape the notion that Johnson was just very unlucky with the jury he was landed with – after all, if discussing the collective position of the market ahead of a Fix as the chat room traders did is not impinging the ‘right to control” at the centre of the Johnson case then I don’t know what is. I am in no way saying I want to see the so-called “cartel” re-trialled, rather I am asking how can it be OK for one group of traders to trade ahead of the Fix while sharing information, while it is not for a single institution to do it by keeping the information in house? The problem is probably down to there not being an easy “victim” in the chat room saga, whereas in this case – even though it did not sue HSBC – there was Cairn Energy.
The positive for the FX industry more broadly is that the concept of pre-hedging has been by-passed by the judges, which should be seen as an acceptance of the practice as long as it meets the criteria around transparency set by the FX Global Code. The bad news is that people talking to clients will have to be very, very careful about what they say.
I have little doubt that Mark Johnson has been convicted because of a certain lassitude around the language used in trading rooms. There was enough evidence provided to prove that Cain Energy knew HSBC was going to buy ahead of the Fix, and that that would be how it made its money, so how could he have lied to the customer? The devil is probably in the detail in that other HSBC staff made comments that Johnson either didn’t know about or let pass, that have consequently been seen as misleading the client. A question I would ask – and my sources tell me it is being asked in a somewhat panicky fashion by salespeople across the business – is where does this leave a salesperson who has ‘guessed’ at what is going on in the market?
No-one likes to look uninformed and in the era of electronic trading where less goes across the sales desk, if a salesperson is asked a simple question, for example, ‘why is Cable higher?’ and they do not know, are they going to say that and have an unhappy client with a lower opinion of them, or are they going to make an informed guess? If you read the judgement in the Johnson case (which will now be a precedent), the very act of guessing could be construed as lying (and if there is a profession adept at construing actions in multiple ways it is the legal world) and therefore someone could be in the frame for a day in court.
The result of this is likely to be an even more vanilla service to clients when it comes to market colour. I have been speaking to clients on the buy side for a couple of years now who are unhappy with the service they receive from some banks mainly because the only market colour or execution advice they get is a data dump – I suspect that today those same clients will understand why, and they will also expect it to become a broader problem.
There are also going to be a few people even more careful when it comes to dealing with US counterparties or on US soil – for let us not ignore the fact that this is a US-specific issue, a UK court did not see good reason to extradite Stuart Scott over the Cairn deal.
By far the biggest problem, however, is going to be the statement from the appeal judges that Cairn could have refused payment because it was unhappy with the quality of the execution (even though the record shows it expressed little or no concern over the outcome at the time).
This opens a can of worms that is almost impossible to clear up. As I noted in this week’s In the FICC of It podcast, there are executions that go wrong every single day in all markets, including FX. So if something happens that is not the result of the executing party’s actions, will a customer withhold payment? In a non-CLS world – and there is a real chance that the customer transaction will be non-CLS – this raises all sorts of risks that the banks have to take into account. Who would be the market or credit risk officer who has to take into account an increased possibility of non-payment? It sounds outlandish – and it probably is – but it only has to happen once and the FX world is turned upside down.
The only safe solution for the banking world is to reinforce its push for clients to use algos – in other words maintain the trend of market risk moving to the buy side. The problem is the buy side is showing it doesn’t really want this at the moment, and if volatility rises it will want it even less, so the second option will be to push this volume to a public platform where there is no advice given, only tools to be used by the client (and I went into the downside of this in Thursday’s column last week), which means? Market risk stays with the client or they get much wider spreads because the risk transfer is in competition
So there is nothing but bad news from last week’s judgement as far as I can see it. A foreign exchange trader is facing the unthinkable in terms of jail time for doing his job in the same fashion as most of his peers at the time; the FX industry is facing uncertainty around what it can and cannot say to a client (and how it says it); and the clients? Well the only realistic outcome from this is the client being left to fend for themselves – is that a good thing? Maybe, for the super-sophisticated firms at the top of the ladder (I would argue they still need good liquidity), but for the rest, nothing but trouble awaits.